Tax rises 'may be last straw'

GORDON Brown's tax-raising Budget faces severe criticism on Monday from an independent forecasting group using the Treasury's own computer model.

The rise in National Insurance contributions for employers will hit companies already reeling from the world downturn, the Item Club will warn. 'The risk is that companies will take another look at staffing levels.'

Item, funded by accountancy group Ernst & Young, believes Brown's huge boost in public spending will add to upward pressure on interest rates, putting businesses under even greater strain. The report says the spending surge also risks 'raising expectations among public sector workers and suppliers, pushing up contract prices and wage demands'.

The economy would have come back into balance of its own accord, with consumer spending slowing, allowing manufacturing to pick up, adds Item. 'Regrettably, the Budget works in the opposite direction - to upset the balance of the economy.'

Peter Spencer, Item's economic adviser, says: 'For many companies, an extra one% on labour costs may prove to be the last straw.'

Beyond that, there are two risks attached to the rapid acceleration in public spending, according to Spencer. 'The first is that higher wages and prices will further reduce expenditure on actual services, undermining the Government's ability to deliver on its promise of making those services better,' he says. 'The second is that, in the longerterm, public sector pay increases could act like rises in the minimum wage, tending to raise labour costs for the private sector.'

The report concludes: 'The surprise was that the Chancellor did not aim this tax rise fairly and squarely at the consumer. In our view, it would have been better to raise these funds from the household sector, helping to moderate the boom in consumption and housing. Companies are reeling from the effects of the world downturn, and not just in manufacturing. They have paid heavily in the Chancellor's five previous Budgets and should have been let off lightly.'